Small-caps to grab limelight on Bursa

MRCB, UEM Land, Dialog, Kencana, SapuraCrest, 3A Resources and Land & General should attract keen rotational plays, says a head of research

Share prices on Bursa Malaysia rose a for a second week, lifting the blue-chip benchmark index to a two-month high while small-cap stocks staged a strong comeback by late week as retail participation in the sector picked up after a month-long absence due largely to the Fifa World Cup distraction.

The 30 blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) climbed 12.34 points, or 0.93 per cent last week to settle at 1,336.65, with Axiata (+11 sen), Maybank (+12 sen), Public Bank (+16 sen), Tenaga (+16 sen) and Sime Darby (+10 sen) contributing to three quarters of the index's increase.

Average daily trading volume recovered to 680 million shares with average value at RM1.19 billion, compared with 561.6 million shares and RM1 billion in the previous week, as more retail investors returned to the market.

News about Bina Puri winning a contract for the new low-cost carrier terminal worth close to RM1 billion is a good indication for greater project flows in the months ahead for domestic spending to pick up the slack from moderating exports growth. Next on the platter could be the news on the winners for the outstanding two public transportat projects worth some RM1 billion that involve monorail and buses in the Klang Valley.

With a surprise cut in fuel and sugar subsidies last week and more such measures expected to come in the months ahead, it is crucial to speed up long-pending transport projects to avoid a public backlash.

A point to note is that to reap maximum benefits from these projects, local players with readily available expertise and facilities should be given priority in any government project to prevent speculation about the presence of rent-seekers and hidden hands with vested interest in awarding public sector projects.

The grapevine has it that Scomi Engineering has been awarded a RM400 million contract to supply 48 coaches (12 four-coach sets) for the Kuala Lumpor Monorail but an official announcement is pending a final discussion with Syarikat Prasarana Negara to tie up some loose ends on additional requirements.

Although it has the capacity to supply about 350 buses annually to meet growing demand in the Klang Valley, news has it that the contract to supply buses has been awarded to three other bidders. One of them, MAN Truck & Bus (M), is an associate company of listed MBF Holdings. It has a tie-up with DRB HICOM to assemble the buses.

The potential involvement of Intercoach Sdn Bhd through a tie-up with a Chinese bus maker is perplexing as based on available information the latter does not have any manufacturing/assembly facility in Malaysia. Nonetheless, it may not be a big loss for Scomi Engineering as it is busy with assembly of long-haul luxury coaches for the private sector.

Besides, it may benefit from its partner Larson & Toubro's successful bid for the Hyderabad metro rail project worth about RM8.5 billion last Thursday.

Winners of contracts for the RM7 billion LRT extension project could be announced in late November or early December this year after Syarikat Prasarana vets through the bids that will be submitted by next month. It is not clear whether all 17 qualified main contractors will bid for it. Among them are the units of listed players like Gamuda, IJM, MMC, MRCB, WCT, UEM and Ranhill.

As for the broader market, sentiment today could be affected by the US market's weak performance last Friday after it was affected by worries about worsening economic outlook in the second half of this year.

Economic indicators last week showed US consumer sentiment and manufacturing expansion had deteriorated in July and a similar outcome could prevail when some important numbers on housing starts and building permits are revealed this week.

The outcome of European bank stress tests that will be revealed on Friday could act as a market dampener for the whole week as investors choose to wait on sidelines before making any investment decisions.

Technical outlook

Spot month July KLCI futures contract traded on Bursa Malaysia Derivatives was up 12 points or 0.9 per cent week-on-week to 1,340.5 for a slightly lower 3.85 point premium to the cash index, compared with the 4.19 point premium the previous Friday.

Stocks on Bursa Malaysia extended gains for a fifth trading session last Monday, matching modest gains in the region on hopes China will relax property curbs as economic growth cools.

The FBM KLCI was up 2.43 points to settle at 1,326.74, off an opening low of 1,323.55. Despite softer regional markets after China reaffirmed curbs on property speculation, the benchmark index rose for a sixth straight session on Tuesday, but lower liners extended their consolidation in cautious trade.

The FBM KLCI gained 6.13 points to end at the day's high of 1,332.87 on less positive breadth.

The local market extended gains on Wednesday, matching regional rises after Intel Corp reported record second-quarter sales and Singapore raised its growth forecast.

The blue-chip barometer shot up 8.21 points to end near the day's high at 1,341.08 on more bullish market breadth and stronger volume which spiked up to 801.7 million shares, the highest for the week.

However, share prices fell on profit-taking after a seven-day winning streak on Thursday, copying regional corrections on concern economic growth will slow after US retail sales declined and China's second-quarter gross domestic produt growth slowed. The FBM KLCI lost 7 points to settle at 1,334.08 as the trading pace slowed.

While blue chips mostly extended their consolidation ahead of the weekend, rotational plays on lower liners picked up significantly on improved buying momentum with more retailers returning to participate after a month-long absence due to the Fifa World Cup distraction.

The index ended up 2.57 points at 1,336.65 for the day, as trading volume picked up to 793.6 million shares.

The trading range last week contracted to 18.4 points, compared with the 32.9-point range the previous week.

Among other indices, the FBM Emas Index added 117.55 points or 1.32 per cent last week to close at 9,048.43, while the FBM Small Cap Index rallied 354.73 points, or 3.28 per cent to 11,179.2, as small-cap stocks stole the limelight in terms of strong percentage gains.

The daily slow stochastics indicator for the FBM KLCI crossed for a sell signal deep in the overbought zone, implying weakness ahead, which is further reinforced by a similar sell signal on the weekly indicator triggered in the overbought region. However, the 14-day and 14-week Relative Strength Index (RSI) climbed higher towards the 60 reading, suggesting improving upside momentum.

Meantime, the daily Moving Average Convergence Divergence (MACD) signal line expanded higher following last week's buy signal, while the weekly MACD signal line has hooked up to indicate improving upside potential. Meanwhile, the +DI and -DI lines on the 14-day Directional Movement Index (DMI) indicator sustained a bullish expansion, but the ADX line weakened to suggest a weakening uptrend.

Conclusion

As suggested by the daily and weekly slow stochastics fresh sell signals, the FBM KLCI should see a more significant profit-taking correction this week, reinforced by the sharp correction on Wall Street last Friday following weaker-than-expected profits from banking stocks and as consumer confidence in the US fell to the lowest point in a year.

Nevertheless, while blue chips correct, rotational trading interest in small-cap stocks should increase as investors take profits on blue chips and shift to trade lower liners for better percentage profits.

Nonetheless, expect 1,325 on the FBM KLCI, which represents the 76.4 per cent Fibonacci Retracement (FR) of the sell-down from the 1,349 peak of May 4 to the 1,243 trough of May 27, to cushion immediate downside risk.

Subsequent stronger retracement supports are at 1,309 (61.8 per cent FR), 1,297 (50 per cent FR), and 1,284 (38.2 per cent FR). Immediate resistance is now at last week's high of 1,342, with stronger hurdle at the May 4 peak of 1,349.92.

Hence, continue to take profits or sell rallies on blue chips, and switch to bargain lower liners such as rubber glove makers Adventa, Latexx and Supermax on dips for medium-term upside.

Chart wise, other lower liners such as MRCB, UEM Land, Dialog, Kencana, SapuraCrest, 3A Resources and Land & General should attract keen rotational plays.

The subject above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.